Who is going to win the Rugby World Cup? Ask any supporter for their opinion and they will tell you exactly what they think with a degree of certainty backed by a number of reasons to justify their forecast. Regardless of their knowledge it’s quite easy for the amateur pundit to put together a rational argument for their prediction.
However, it’s not so easy to act on your opinion when there is money on the line. When emotion mixes with money, things start to go awry. Suddenly that ardent Springbok supporter feels less confident about South Africa beating the All Blacks.
According to Philip Bradford, the Chief Investment Officer of Sasfin Asset Managers, you should think like an investor.
“The global sports betting market is big business and is remarkably similar to the stock market. The odds are set by a combination of professionals and amateurs placing their money on a particular outcome. And as with financial markets, the larger the bet, the more it affects the odds. Therefore, the betting odds are effectively the combined opinions of punters all over the world, but importantly dominated by the big money and the professionals. So, if you know nothing about rugby and want to have a chance at winning the office RWC pool, then just copy the betting websites. It’s as close as you will get to an expert opinion.”
This means it’s unusual to find an opportunity where one of the favourites is offering good odds. The All Blacks are currently offering odds of only 1.2:1. This means that if you correctly pick the All Blacks you will not make much money. However, about two months ago you could get 10:1 on the Springboks winning the tournament because everyone was negative towards their potential to win. That would have been a good bet. Today their odds are 4:1.
“Picking the favourite to win may be the safe option but it is seldom very profitable,” says Bradford. “Financial markets are very similar, and the weight of investor money means that the low-risk investments usually offer low returns and the ‘outsider’ offers high potential returns but with high risk.”
“However right now, like the Springboks a few months ago, our markets appear to be priced incorrectly with the lower risk investments (SA bonds) offering similar returns to the high-risk investments like equities. It’s a bit like getting the All Blacks to win the RWC at better odds than Australia or Wales. In our Sasfin BCI Flexible Income Fund, we are currently earning between 10% and 12% on the bonds we hold. Both cautious and aggressive investors should really look to take advantage of an opportunity like this before it disappears.”
Want to know a sure thing when it comes to building an investment portfolio? “Bonds are the next step up from cash when an investor is looking for extra return with only a little bit of extra risk. They are basically the same as a fixed deposit,” says Bradford. “Fixed income assets in South Africa are currently providing equity-type returns without the uncertainty and are likely to continue to comfortably outperform inflation and cash.”
“In my opinion, South African investors tend to have too much exposure to equities in their pension funds. Stocks performed unusually well in the 1990s and early 2000s and investors assumed that it was normal to get 15% to 20% a year. Unfortunately, it is not. Over the last 30 years SA bonds have returned inflation plus 5% on average which is also a good return.”
Bradford says the outlook for equities is uncertain and the bonds they are holding are yielding over inflation plus 6%. Therefore, he is holding much more bonds in the funds he manages than his peers.
“With a local economy on the ropes, a lot of uncertainty in global markets and the back end of the longest US bull market in history, the potential returns from equities for the next five years are not expected to be good. So, with the low-risk investments giving my investors over 10%, it’s really an easy decision. It’s like getting the All Blacks or the Springboks at 20:1.”